Launching a business on Shopify can be done quickly, but it’s best to take a little time to think about your Shopify accounting, bookkeeping and inventory systems even before you make any sales.
Overview of Shopify Accounting
When starting up a Shopify business, there are several tasks that you’ll need to complete to set your business up with a robust accounting system.
It’s important for you to accurately calculate and collect sales tax based on the location of your customers. Since rates and rules vary by jurisdiction, staying informed and compliant is essential, particularly when selling to customers in different states or countries.
To benefit from tax deductions, you must keep diligent records of business expenses, including marketing, shipping, packaging, and transaction fees. Regularly updating these can help maximize deductions during tax season.
Properly tracking inventory costs and quantities can affect a business’s profitability and tax liabilities. You must pick a consistent approach (such as first-in-first-out (FIFO)) for tracking your inventory.
Depending on the business’s legal structure and location, you might need to pay quarterly taxes. Accurately predicting and setting aside funds for these taxes can prevent future financial strain.
For new sellers, you’ll want to create a bookkeeping system from the beginning to ensure that you’re tracking all of your expenses and not missing any deductions. To do this, you’ll need to pick an accounting software. Small businesses might be able to work with a spreadsheet system, but larger companies will require specialized accounting software.
When picking the right software, you’ll want to consider features such as sales tax automation, inventory management, and integration capabilities with Shopify. Depending on your projected sales and the complexity of your business, you should consult an accountant who can help you establish a chart of accounts.
Shopify Challenges
When selling through Shopify, you’ll encounter some unique platform challenges.
Shopify Accounting Inventory Management
The way you track inventory can have significant tax implications. You’ll want to consider each inventory tracking system to determine the most beneficial for your business.
Last-in, First-out (LIFO):
LIFO will maximize your cost of goods sold (COGS) if you’re in a high-inflation environment (as we currently are). The most recently purchased products are the ones you take out of inventory (and expense) when you make a sale.
First-in, First-out (FIFO):
FIFO is the most common type of inventory system. In this system, the oldest items in your inventory are the ones you sell first. This may understate your COGS in a high-inflation environment.
Weighted-Average Cost:
In this system, you take the average cost of all the items in your inventory when you make a sale. This smooths out fluctuations in your expenses but may not accurately represent your current costs.
Specific Identification:
You identify each item at the time of purchase and sale. This method works best for unique items where you may only have one on hand.
To pick the best method for your business, you’ll need to consider what type of items you’re selling, your tax situation, and how complex your inventory is. You’ll need to stick with your method or file a change of accounting method if you change it in the future, which may require complex calculations and have tax implications.
Minimizing Headaches
You can do several things proactively to minimize the potential headaches involved in running a Shopify business.
You should review your accounts regularly to ensure you spot any discrepancies before they can snowball into major problems. Furthermore, monitoring your financials will also ensure your profit margins remain on track.
You’ll want to establish a robust bookkeeping system from the outset. Accurate books can help you with decision-making and budgeting. A sound bookkeeping system can also smooth out your year-end tax preparation, since your books will be ready to go at tax time.
The most crucial aspect of your accounting system for Shopify businesses is its integration with Shopify. Good accounting software will automate sales and inventory data entry from Shopify, reducing errors (and the time spent entering transactions). You’ll also want to ensure that your accounting software can grow with your business as your business scales.
Using Shopify Software to Automate Taxes
Shopify offers robust tax automation features, simplifying the complex web of global e-commerce taxation. By default, Shopify configures tax rates based on the store’s location and shipping destinations. When integrated with apps or plugins, Shopify can automatically calculate and apply the correct sales tax rates at checkout based on the customer’s location and the product type.
The benefit of using Shopify’s system is that it reduces human error since it processes transactions without requiring additional data entry. Since you don’t have to record transactions or calculate taxes manually, you’ll save significant time each quarter when you need to calculate your sales tax payments.
Tips for Organizing Shopify Accounting Expenses
The most important thing is to stay up-to-date on your expense tracking to ensure that your books are accurate. But there are a few other ways you and streamline your bookkeeping processes:
- Assign categories to transactions as soon as possible after the transaction occurs. This will save you from having to reconstruct expenses later and figure out the purpose of your purchase.
- Keep your business and personal expenses separate. Ideally, you should have a different bank account and credit card for your business to make it easier to identify which expenses are business related.
- Use tools that integrate with Shopify to minimize double entry of business transactions.
- Keep all records digitally. You can scan receipts and invoices, making them easier to find later.
Closing Thoughts on
Creating a business on Shopify allows you to streamline your inventory and bookkeeping systems through integrated software. With careful planning, you can create a strong bookkeeping and inventory system that can grow with your business.
Retailers using Shopify will also benefit from Shopify’s automated sales tax collection and reporting system, which will minimize data entry errors and minimize the time you need to spend processing sales tax.
Got questions? We’ve got answers. Whether you’re new to Shopify or just need a helping hand, our team is here to support you every step of the way. No question is too small. In fact, you might even find the solution you’re looking for in our complimentary strategy session. Set one up today and let’s tackle those questions together.